How China’s Economic Boom Will Eventually Affect Us All

By Michael Lombardi, MBA Published : July 12, 2006

China just announced its trade surplus to the world widened to a record $14.5 U.S. billion in June because of soaring Chinese exports. China’s trade surplus could come in for the year at $110- $120 U.S. billion this year, up from $102 U.S. billion in 2005.

What does this mean for investors like you and me?

China’s booming surplus results in China accumulating plenty of foreign currencies… money China is receiving for goods it makes. It is estimated that China’s foreign reserves currently stand at about $875 billion–a great deal of that currency in U.S. dollars.

At some point, China will have close to $1 trillion U.S. dollars in its reserves. What will China do with all those U.S. dollars?

Most economists in the U.S. are calling on China to revalue the yuan (the Chinese currency)… to make the country’s currency stronger against other world currencies. And China has taken some steps in this direction. China raised interest rates in April of this year and, last month, increased the amount of money Chinese banks need to set aside as reserves.

But the problem may not be the yuan. The problem, as I see it, is too many U.S. dollars in China. The greater the amount of any item, in this case the greater the supply of U.S. dollars in circulation, the lower the price. As investors, we should look carefully at stocks we own directly or indirectly in our mutual funds, to ensure we don’t own equities that are dependent on a strong U.S. dollar.

Tomorrow, I’m going to talk about the long-term trend “change” in the value of the U.S. dollar, how I believe in the long-term it will compromise the current U.S. standard of living, and why I believe interest rates will need to remain at their current levels in the U.S. so the U.S. dollar is saved from collapse.

For today, I’d like to leave you with this question: If the U.S. dollar is weakening, if the countries tied to the euro have yet to constitutionally recognize the euro, if the yuan is years away from being recognized as a stable currency… What other currency will investors move their money into? (A hint: This currency is not printed on paper.)